Thursday, 16 October 2008

John Humphries learns how money is created

Three interviews with financial experts on Radio 4 this morning. The first with John Humphries was excellent. The interviewee explained, to the astonishment of JH, that it is commercial banks that create money, not the government.

Many of us have known this for some time (I worked in banking as my first career), but it is only now that people are really starting to question what is happening in our economic system, how it works and why we are in such a mess.

Banks simply create money by lending out money deposited with them while retaining the account balances. If I pay in £100, they credit my account and can lend this money out to someone else who spending it, the money is paid in again and the cycle continues with the account balances and loans getting bigger and bigger. The process is fractional reserve banking and has been in operation for 500 years.

The fact that private banks have created 97% of the £1.7 trillion in the UK economy helps explain some of the problems. If I printed money, I'd be arrested - somehow banks get away with it. Surely it is the government's role to create money.

"The process of money creation is so simple, the mind is repulsed" - JK Galbraith

"What is the crime of robbing a bank compared with the crime of founding one?" - Bertolt Brecht